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Homebuyer credit sales, related audits up, but other IRS audits likely to be lower

Here's a piece of news that was totally expected. The April 30 expiration of the first-time homebuyer credit prompted more people to buy houses last month.

And in connection with those purchases, we get another statistical bump that's also unsurprising. The IRS is auditing more tax returns that contain those homebuyer tax credit claims.

Good news for Realtors: First, the good news for the economy, or at least the housing sector of it. The National Association of Realtors announced today that existing-home sales rose again in April. 

In addition to the tax credit lure, NAR cited improving consumer confidence and favorable affordability conditions.

As long as buyers had a valid contract in place by April 30 and close on the home by June 30, they can claim the credit on either their 2009 or 2010 tax returns.

Bad news for credit claimants: Now about the documentation needed to make such a filing…. 

The bad news is that requirement apparently has been posing lots of problems for the IRS and taxpayers waiting for their credit-related refunds.

Remember back in November 2009 when the credit was expanded and extended into this year, a new set of rules were also created to ensure that the previous abuse of the credit -- OK, flat-out cheating -- was stopped.

Since then, the IRS has demanded that filers of Form 5405 attach some sort of verification that they meet the credit's conditions. The preferred documentation is a settlement sheet, showing all home sale/purchase parties' names and signatures, property address, sales price and date of purchase. If you don't have that, page 2 of the form's instructions offers alternatives.

However, in many cases, such paperwork -- and it is paper; remember that you can't e-file if you claim this credit -- has been missing. By some accounts, more more than 260,000 returns have been selected for correspondence audits so far this year because taxpayers didn't attach sufficient documentation to their returns. 

Those folks have been getting letters, technically known as correspondence audits, asking them to send in the proper material. 

Do it or you won't get any refund that the credit might produce. 

Don't comply with the IRS request and you could face worse results. If you don't prove you're eligible and the loss of the homebuyer credit means you then end up owing taxes, you'll have to pay that money plus penalties and interest.

A better audit equation for the rest of us: But there's a third calculation in play, too.

The good news (more home sales) plus the bad news (increased scrutiny for homebuyer credit claimants) equals a better result for the remainder of us filers without a new home tax break to report.

The credit's sheer numbers mean that our returns will likely get just a basic IRS review before being sent through the tax processing chain.

Just take a look at the figures presented by National Taxpayer Advocate Nina Olson before the Senate Finance Committee on April 15.

"If a tax return as filed meets certain criteria, it is referred to the Examination function for a determination whether to select the claim for audit, accept the claim as filed, or disallow the claim on other grounds. Since the enactment of the The First-Time Homebuyer Credit (FTHBC):

  • As of February 27, 2010, taxpayers had filed more than 1.8 million original and amended returns that include FTHBC claims.
  • Of those returns, more than 260,000 had been selected for examination through March 26, 2010.
  • Of the FTHBC returns selected for examination, nearly 109,000 of these audits remain open.

To place the issue in context, the IRS through March 2010 closed over 650,000 correspondence examinations in FY 2010. Of these closed exams, 139,298 involved the FTHBC. FTHBC exams thus account for almost 21 percent of the IRS's total correspondence audits so far in FY 2010, and these data do not include open FTHBC exams and FTHBC returns filed since February. The number of FTHBC claims that the IRS will select for examination during the remaining six months of FY 2010 (April-September) is unknown at this point, but it is likely that FTHBC examinations will displace a significant additional number of regular discretionary audits before the year is through."

Note Olson's conclusion: "it is likely that FTHBC examinations will displace a significant additional number of regular discretionary audits before the year is through."

That means return entries that IRS examiners might have looked at more closely in prior filing seasons are getting passed over as they focus their limited resources on the more detailed homebuyer credit claims.

So while those of us who didn't recently purchase a residence might not get a direct tax benefit from the first-time homebuyer credit, it's nice to know that it did help us out a bit.

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Elizabeth R.

We had several clients who received the correspondence audit telling them they didn't attach documentation. However, we review those returns before they are mailed out and we know they did. The letter also states that if they had electronically filed their return, they would have reduced their chance of error. (Uh, hi? IRS? Do you read your own instructions?) I am not impressed with the California processing center we had to start using this year.

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